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The study investigated the impact of the impact of small and medium scale financing and unemployment reduction in Nigeria using time series data from 1992 to 2015. The study emphasized on deposit money banks credit to SMEs in Nigeria. Having analyzed the dataset using multiple regression analysis and Johansen cointegration test, it was found that a long run relationship exist between unemployment rate and measure of deposit money banks credit to SMEs in Nigeria. Also, it was found that deposit money banks credits to SMEs have not impacted significantly on unemployment reduction in Nigeria. Based on the findings, it was recommended among other things that Nigerian banks, insurance companies and all tiers of government should collaborate to develop Business Parks in all the states of the country for SMEs.




1.1     Background to the Study

The issue of unemploymenthas been receiving increasing global focus and the challenges are becoming more daunting. It is, however, encouraging to note that research findings and empirical evidence have shown that significant unemployment reductions are possible and have, indeed, occurred in many developing countries (Owenvbiugie and Igbenedion, 2015; Abdulahi, Aliyu, Umar, Umar, Sabiu, Naisa, Khalid and Abubakar, 2015; Hussain, Bhuiyan and Bakar, 2014; Makinde, 2013). In particular, it has been established that growth, poverty and unemployment reduction go hand- in-hand. For example, studies have revealed that the absolute number of people living in poverty and unemployed has dropped in all the developing countries that have experienced sustained economic growth over the past few decades (Eze and Okpala, 2015). The relevant question is, what type of policies can influence full employment in an economy?

The rate of unemployment in Nigeria is one of the highest in the world which is at 24 per cent; and over 50 percent of the youths in the urban areas are unemployed (Chiwenuba and Okpala, 2015; Agboola, 2013). Consequently, the situation has assumed a worrisome dimension of economic and social crises as there has arisen a relationship between rising criminality and unemployment (Oregwu and Chima, 2013). This is the more reason why those at the leadership positions in the country should urgently take steps towards accelerating the support for Small and Medium Scale Enterprises (SMEs) and business start-up through capacity building and funding as finance is very vital to the SMEs. In Nigeria, the small and medium enterprises are found wanting probably because most of them cannot access loans for their operations and growth.

According to Edom, Inah and Emori (2015) small and medium enterprises (SMEs) occupy a place of pride in virtually every country or state. As such, given the significant roles SMEs play in the growth and development of various economies, SMEs have aptly been referred to as the engine of growth and catalysts for socio-economic transformation of any country. Similarly, SMEs represents a veritable vehicle for the achievement of national economic objectives of employment generation and poverty reduction at low investment cost as well as the development of entrepreneurial capabilities including indigenous technology (Adegbuyiet al., 2016). Consequently, given the relevance of SMEs in terms of employment creation, it becomes pressing to strengthen the various means through which financial resources are expected to freely flow to the SMEs in Nigeria.

The role of finance is very important in the development of Small and Medium Scale Enterprises (SMEs).Finance is the life wire of any economy, whether developed or developing. Finance is to commercial pursuit as blood is to the human body. According to the guidelines for accessing credit facilities for Small Scale Enterprises in Nigeria by Moruku (2002), there is potential in Small and Medium Scale Enterprises to create employment, reduce underemployment and poverty, utilize local raw materials output expansion and transformation of indigenous technology. Unfortunately, the SMEs in Nigeria have been faced with severe financial problems such as multiple taxation, difficulty in accessing credit; and the financial institutions, including commercial banks, are very critical to national economic development, but they are not helping the SMEs.

1.2     Statement of the Problem

According to Makinde (2013) unemployment, underemployment and unmitigated rural-urban migration have come to characterize the Nigerian labour market. This has been compounded by frightening number of joiners as schools, polytechnics and universities churn out leavers in a geometric progression. This has impacted on the rate of social vices like robbery, kidnapping, prostitution, human trafficking, child abuse and unfair labour practices experienced mostly by the unemployed youths, which are other noticeable dimensions to the complexities of contemporary Nigerian employment dynamics.

With a population of about 150 million and GDP/capita of $641, census (2006), two-thirds of Nigeria people are poor; Nigeria has the third highest number of poor people in the world. Most of these poor people are dependent on small and medium scale enterprises for their livelihood. As such, their entrepreneurial contributions are strategic to the Nigerian economic development and their growth has great potential to contribute to income generation and poverty alleviation. Various interventions have been made in different countries to cater for the peculiar needs of SMEs. These interventions include: institutional support, training in the relevant skills, tax concessions, technological acquisition and liberalized access to credit and innovation schemes (Radwan, 2009; Rahman, 1999).

Consequently, the government have made several efforts to address the issue of unemployment. Attempts made to address the problem of unemployment in Nigeria include direct lending by various financial institutions to the Small and medium Scale Enterprises (SMEs). Similarly, specification of credit guidelines by the Central Bank of Nigeria to banks’ lending to SMEs at concessionary rates through participating banks (Otero, 1999; Inegbenebor, 2006). Other schemes include the establishment of the second tier security market, the merger of the Nigerian Bank for commerce and industry, the Nigerian Industrial Development Banks and the National Economic Reconstruction Fund into the bank of industry to provide cheap financial and business support services to SMEs. All these have not been as successful as anticipated. Studied on lending experience of five major banks in Nigeria from 1990-2006 showed that non-performing loans and advances range from 40-50% among commercial banks. The poor attitude of Nigerians to loan repayment led to unwillingness of the banks to lend to the real sector in preference for the trade sector (Feese, 1994; Inegbenebor, 2006).

Nevertheless, the funds available for SMEs financing have been dismal. The total credit to SMEs which was ₦50,672 million in 2005 decreased to ₦25,713 in 2006 and ₦12,550 in 2010. By 2015, it further depleted to ₦12,949 (CBN, 2015). Within this period, unemployment rate in Nigeria increased from 11.9% in 2005 to 12.3% in 2006, 21.1% in 2010 and 27.1% in 2015 (World Development Indicators). This implies that unemployment rate will continue to accelerate with low level of SMEs financing. This recognition informed the need to examine the role of small and medium scale financing and unemployment reduction in Nigeria.

1.3     Objectives of the Study

The main objective of the study is to examine the impact of small and medium scale financing and unemployment reduction in Nigeria.  The specific objectives are:

  1. To ascertain the effect of small and medium scale business financing on unemployment reduction in Nigeria.
  2. To ascertain if there is a sustainable long-run relationship between SMEs financing and unemployment reduction in Nigeria.

1.4     Research Questions

The study was guided by the following questions:

  1. What is the impact of SMEs financing on unemployment reduction in Nigeria?
  2. Is there a sustainable long run relationship between Small and Medium Scale financing and unemployment reduction in Nigeria?

1.5     Research Hypotheses

The following hypotheses was tested in this study:

Hypothesis One:

H0: Small and medium Scale Enterprises financing does not have any effect on unemployment reduction in Nigeria.

H1: Small and medium Scale Enterprises financing has effect on unemployment reduction in Nigeria.

Hypothesis Two:

H0: Small and medium Scale Enterprises does not have a sustainable long run relationship with unemployment reduction in Nigeria.

H1: Small and medium Scale Enterprises financing has a sustainable long run relationship with unemployment reduction in Nigeria.

1.6     Data Sources and Scope of the Study

The data to be used for the study was sourced from Central Bank of Nigeria Statistical Bulletin and Statement of Account 2015. The data will cover the period 1992 to 2015. The period chosen for the study was due to the fact that it covers the period of the long awaited transition from military regime to democratic regime. It also covers the period

1.7     Significance of the Study

The findings of this study will contribute to a body of knowledge and increase information in the area of loan assessment to small scale business owners. Therefore it will be of immense importance to small business operators, government, industrialists, and other stake holders in the industrial sub-sector.


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